The Federal Court of Appeals in the US has annulled the sanctions imposed by the Treasury Department on Tornado Cash. This cryptocurrency mixing service allows users to anonymously trade cryptocurrencies via smart contracts.
The Fifth Circuit Court of Appeals’ ruling marks a significant victory for decentralized technology advocates and privacy advocates. At the same time, it has sparked debate about how to regulate the use of blockchain tools in connection with criminal activity.
Treasury Department Sanctions on Tornado Cash has been cancelled
The Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in 2022. According to the agency, the platform has been a key tool for illicit actors, including the Lazarus Group of North Korea, to launder stolen money.
However, the court held that OFAC had exceeded its authority. The court emphasized that the immutable smart contracts that underpin Tornado Cash cannot be considered assets under the International Emergency Economic Powers Act (IEEPA).
The appeal court’s ruling depends on the nature of Tornado Cash’s smart contracts. These are lines of self-acting code designed to operate without human intervention.
These contracts, deployed on the Ethereum blockchain, are immutable and accessible by anyone. The court found that such contracts did not meet the legal definition of “property” because they could not be owned, controlled, or limited.
“The relevant immutable smart contracts are not property because they are not capable of being owned,” the court said. write.
The court also noted that while sanctions may prevent some individuals from using Tornado Cash, the decentralized nature of the technology ensures that no one, including North Korean hackers, can may be completely prevented from accessing. Paul Grewal, Coinbase’s Chief Legal Officer, praised the ruling.
“This is a historic victory for cryptocurrency and everyone who cares about protecting freedom… These smart contracts must be removed from the sanctions list and American citizens will once again be allowed to use this privacy-preserving protocol. In other words, government overreach will not be tolerated… No one wants criminals using cryptocurrency protocols, but completely blocking open source technology just because a small fraction of users is Bad objects are not what Congress has authorized. These sanctions stretched the Treasury Department’s authority beyond recognition, and the Fifth Circuit agreed.” Mr. Grewal write on X (formerly Twitter).
Grewal also emphasized the importance of distinguishing between tools and their misuse. Notably, Coinbase, a leading cryptocurrency exchange, is one of the entities that sued the government over these sanctions.
Wider implications for cryptocurrency regulation
This ruling exposes the challenges in applying current regulatory frameworks to decentralized technologies. Cryptocurrency mixing services like Tornado Cash lie in a legal gray area, calling for scrutiny from US lawmakers.
They are not traditional financial institutions (TradFi) or entities that can be controlled by a central authority. Critics of the ruling say it could encourage bad actors to take greater advantage of blockchain technology.
“If you think Tornado Cash has been used by good people for worthwhile purposes then make your case… If privacy protects good people, it is good, if it protects bad people, it is bad. The majority of people Tornado Cash protects are doing bad things,” said one user on X sarcastic.
Some lawmakers have previously pushed the Treasury Department to impose stricter measures on cryptocurrency mixers. In 2022, members of Congress raised concerns about their role in money laundering and terrorist financing. A bipartisan effort to ensure that instruments like Tornado Cash, often linked to criminal networks, face regulatory scrutiny.
However, privacy advocates argue that targeting tools instead of wrongdoers undermines the principles of decentralization and privacy. Bill Hughes, an attorney at ConsenSys, praised the court’s sharp understanding of the issue but emphasized an important issue. He warned that correction risks still exist.
“This does not mean that the remainder of Tornado Cash is also outside the jurisdiction of the Department of Treasury/OFAC. The problem is about smart contracts that don’t have an administrative key,” Mr. Hughes said write.
This means that the court ruling does not protect Tornado Cash from further legal challenges, especially involving its founders. As reported by TinTucBitcoin, they face accusations of facilitating money laundering. Furthermore, the broader debate on how to regulate decentralized technologies remains unresolved.
Following the ruling, Tornado Cash’s native token, TORN, increased nearly 400% to trade at $17.63 as of press time.
This price increase reflects investor optimism about the protocol’s potential resurgence and its effects on DeFi (DeFi) projects.